I dug an interesting article up in a search on the "January effect".  Actually, all I was trying to do was see if this web site pops up when "January effect" is entered on Yahoo (it doesn't).  

Here's the idea put forth in the article (dated September 29):  we may see something of a January effect in October for the usual reasons:  tax selling (many mutual funds wrap up their fiscal years September or October) and window dressing.  There's a twist, though:  while some stocks have made very nice gains over the last year or more, many of these gainers still aren't anywhere near their highs of 2000 and 2001.  That means these funds could sell these sorts of stocks before the end of your fiscal year...nice gains over the course of the last year, but still losers from the time of purchase...take a tax loss, and then buy these positions back.  This offers a possible explanation as to why we are seeing the current gains in yearlong gainers.  Given this logic, you'd still expect the usual yearlong losers to prosper...we'll take a look at the end of the month.

The strategy is confounded just a tad by the "wash sell rule", which states that you can't buy back your tax losers immediately...you must wait 30 days.  But this isn't such a big deal...you buy similar companies that you didn't own.  Or simply wait 30 days.

If you buy this argument (sounds reasonable, no?), it's interesting to note that the charts of these stocks should have a well-defined pattern:  1)  Going back a couple years, you see lofty prices, 2)   a bit later, a big drop,  3)  within the last year, a nice upward slope and,  4)  near the end of September, a little pullback.  Now, of course, these stocks are engaged in step 5...more upward action.  In the cited article, Lucent (lu) is given as an example, and this is precisely what you see in the chart, right down to an end-of-September pullback (on a volume spike, I might add).  I'm not much of a chart watcher, but one might imagine a chartist going gaga over the beauty of this formation (for all I know, the technical guys would consider this ugly, but that's not my point).

At this point, Lucent is up nearly 25% from the beginning of October.  There's a miniscule bid/ask on the company, so almost all that 25% is profit.

Now imagine the same chart, but step 4 is completed in, say, the middle of February.  Same chart, but step 5) could be very different given the fact that nobody does tax selling or window-dressing in the middle of February.  It points to the possibility of using charts in conjunction with seasonal considerations. Or, more strongly, it suggests that seasonality can be primary over charting considerations.

As always, things are probably a bit murkier than the above would have it.  After all, we're talking about mutual funds whose fiscal years end in either September or October (supposedly, one third of all mutual funds).  So you've got simultaneous tax-loss selling and buying.  I'll try to take a look at precisely which stocks gained in October at the end of the month, and see what makes sense and what doesn't.

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